Disclosure Modernization Next Steps

On August 8, 2019 the SEC issued a proposed rule to continue its disclosure modernization, update and simplification process.  Interestingly, this rule was issued without an open meeting for discussion.  Continuing the work of the SEC’s 2018 Disclosure Update and Simplification Final Rule and the March 2019 Disclosure Modernization and Simplification Final Rule, this proposed rule would update disclosures in three parts of Regulation S-K:

            S-K Item 101 – Description of the Business

            S-K Item 103 – Legal Proceedings

            S-K Item 105 – Risk Factors

According to the proposed rule release:

“The proposed amendments are intended to update our rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”

Here is a list of details from the proposed rule organized by S-K Item.  You can read more about each proposed change starting at page 10 of the release.

Revise Item 101(a) to be largely principles-based, requiring:

Disclosure of information material to an understanding of the general development of the business and eliminating a prescribed timeframe for this disclosure; and

In filings made after a registrant’s initial filing, only an update of the general development of the business with a focus on material developments in the reporting period with a hyperlink to the registrant’s most recent filing (e.g., initial registration statement or more recent filing if one exists) that, together with the update, would contain the full discussion of the general development of the registrant’s business.

Revise Item 101(c) to:

Clarify and expand its principles-based approach, with disclosure topics drawn from a subset of the topics currently contained in Item 101(c);

Include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and

Refocus the regulatory compliance requirement by including material government regulations, not just environmental laws, as a topic.

Revise Item 103 to:

Expressly state that the required information may be provided by including hyperlinksor cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and

Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

Revise Item 105 to:

Require summary risk factor disclosure if the risk factor section exceeds 15 pages;

Refine the principles-based approach of Item 105 by changing the disclosure standard from the “most significant” factors to the “material” factors; and

Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

It is interesting to note that may of the changes emphasize the principles-based nature of the SEC’s disclosure requirements, and the proposed rule contains an interesting discussion about using this principles-based model.

As a last note, if you want to dig deeply into the proposed revised wording in Regulation S-K, you can find the proposed changes beginning at page 108 of the proposed rule.

As always, your thoughts and comments are welcome!

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